A Little Speculating With Sharps Compliance

Feb.25.10 | About: SHARPS COMPLIANCE (SMED)

I added some shares of Sharps Compliance (NASDAQ:SMED) earlier this quarter. The company provides disposal solutions for medical waste. Trailing earnings look great for the company, but this is largely due to a front-loaded government contract. The real question is whether or not the company can add additional contracts to maintain its momentum.

MagicDiligence has a nice article on Sharps here on Seeking Alpha. They note:

Sales are growing impressively under the one-time noise, and management believes they have over $20 million in pipeline deals with pharmaceutical makers alone. The government contract win led to both a supply schedule contract with the General Services Administration (GSA) of the U.S. Government, as well as a Distribution and Pricing Agreement (DAPA) with the Defense Department. These agreements effectively “grease the wheels” for more government work, a significant opportunity. Almost immediately after these were announced, Sharps launched a pilot program with the Veteran’s Association (NASDAQ:VA) to collect their medical waste in the Mid-Atlantic region.

I peg Sharps' non-contract earnings at about $0.50 per year. At this earnings rate, shares are priced at about 15x earnings. This seems to be a relatively stable price. I view the company as very speculative at this point, but the story is certainly worth watching. As MagicDiligence concludes:

Growth potential is very strong, possibly explosive, and we’ve already seen how higher sales levels lead to much higher profit margins due to the firm’s fixed cost structure.

Disclosure: I currently own shares of Sharps Compliance